Types Of Company

In Hong Kong businesses normally trade as either limited companies, limited partnerships or sole proprietorships. Being a common law jurisdiction the concept of a trust is readily understood and widely used. The tight secrecy, minimal corporate disclosure and loose administrative requirements which characterize some island offshore common law jurisdictions and make these territories attractive locations in which to base commercial operations have no counterpart in Hong Kong, whose company and trust law are virtually identical to their United Kingdom equivalents.

To found a business company in Hong Kong, it is necessary to register with the Business Registration Office of the Inland Revenue Department (Revenue Tower, 4/F, 5 Gloucester Road, HongKong, tel: (852) 2594 0888) within one month of the commencement of business. The annual registration fee is currently HK$2,250 (US$288). In general the minimum capital requirements for a business corporation are very low or nonexistent and all legal business forms are open for foreign participation

Applications for incorporation should be made to the Companies Registry (13th - 14th floors, Queensway Government Offices, 66 Queensway, Hong Kong, tel: (852) 2867 2587). The registration fee ranges from HK$600 (US$77) to HK$1,010 (US$128). Incorporation normally takes 7 to 10 working days, depending on the financial structure of the company.

It is also possible to purchase a shelf company, i.e. an already incorporated private company, through an accounting or law firm or through a secretarial company. It costs about HK$6,400 (US$800) and takes only a few days. Further time is required (about 3-4 weeks) if the name of the shelf company is to be changed.

Corporate entities are governed by the provisions of the Hong Kong Companies Ordinance 1984 which brought the territory's company law into line with United Kingdom company law. Incorporation can take 4-6 weeks. Their key features are as follows:

The minimum number of subscribers and shareholders is two; if the number of shareholders falls to one, the remaining shareholder is personally responsible for the company debts;

There is no minimum authorized or issued share capital requirement;
Shares of no par value and bearer shares are not permitted;
Shares can be issued at a premium or discount (if sanctioned by the court);
A company may purchase its own shares out of distributable profits;
Nominee shareholders, directors and secretary are permitted;
The minimum number of directors is two; corporate directors are permitted (unless the company is a public company);
The articles can provide that the directors' liability for the company be unlimited;
Every company must have a secretary which can be an individual or a corporate body, but must be resident in Hong Kong;
Meetings can be held anywhere in the world;
Accounts must be prepared, filed and audited;
The migration and re-domiciliation of corporate entities to or from a foreign jurisdiction is not permitted;
Annual returns must be filed.

The Articles of Association of a private company must restrict the right to transfer shares, must limit the number of members to fifty (excluding employees), must prohibits any invitation to the public to subscribe for any shares or debentures of the company.he Articles of Association of a private company must restrict the right to transfer shares, must limit the number of members to fifty (excluding employees), must prohibits any invitation to the public to subscribe for any shares or debentures of the company.

Every Hong Kong company must register annually under the Business Registration Ordinance, the fee for which is about US$300.

Overseas companies starting businesses in Hong Kong can form a private company limited by shares, as above, or can simply establish a branch. The registration fee is HK$316 (US$40).

When a company incorporated outside Hong Kong establishes a place of business in Hong Kong, it must lodge the following documents with the Registrar of Companies:

A branch office is relatively easy to set up but is open to greater potential liability than a limited company since it is not treated in Hong Kong law as a separate legal entity.

In some countries, branches have tax advantages as against limited companies, for a foreign parent, but not in Hong Kong: the territorial basis of taxation means that the branch will be taxed exactly as a limited company, on Hong Kong-source income.-

The law is contained in the Limited Partnership Ordinance. Limited partnerships have the following characteristics:

The maximum number of partners permitted by law is 20;

Limited partnerships consist of general and limited partners; there must be at least one general partner whose liability for the firms debts is unlimited; the remaining partners are limited partners whose liability is limited to the amount of their unpaid share capital;

A limited partner cannot reduce or take out his share capital whilst the partnership continues in existence and is not allowed to take an active part in the management of the partnership nor bind the same vis a vis third parties in default of which provision he assumes the liability of a general partner;

Limited partnerships must be registered at the Companies Registry under the Limited Partnership Ordinance in default of which they are deemed to be general partnerships with unlimited liability for each and every partner;
All partnerships are required to obtain a business license under the provisions of the Business Registration Ordinance which license annually costs US$300 per annum.

Trust law in Hong Kong is virtually identical to English trust law and is contained in the provisions of the Trustee Ordinance (an Ordinance which is modeled on the English Trustee Act 1925).

Both fixed and discretionary trusts may be settled in Hong Kong. Documents do not have to be registered and there are no statutory requirements in Hong Kong for a trust to make annual returns, submit audited financial statements, etc., unless it is carrying on business in Hong Kong.

Unlike most offshore jurisdictions Hong Kong has not tampered with trust laws in order to make the jurisdiction a more attractive jurisdiction in which to create a settlement. Hong Kong will therefore not normally be a suitable location for an asset protection trust.

Until 1964 there were virtually no regulations governing the financial sector in Hong Kong. A banking crisis in the 1960s led the authorities to enact Banking Ordinance 1964, which introduced basic standards such as minimum capital requirements and rudimentary disclosure laws. However, bank failures, caused by poor management and excessive investment in the real estate market in the early 1980s, coupled with the stock market crash in 1987, resulted in a complete overhaul of Hong Kong financial market regulations. The country now has a transparent legal and regulatory environment that has facilitated its role as a modern regional and international financial center.

Under the Sino-British Joint Declaration on the Future of Hong Kong, Chinese authorities were committed to enact the Basic Law of the Hong Kong Special Administrative Region. The Basic Law is the legal basis for the "One Country, Two System" guarantee and provides for the continuance of Hong Kong’s system of common law and free market economic system after 1 July 1997.1 The Law stipulates that the Hong Kong dollar will remain freely convertible; that markets for foreign exchange, securities, futures, and other financial products will remain open; and that no controls will be placed on the flow of capital into or out of Hong Kong.

Three government agencies are responsible for regulating Hong Kong’s financial market: the Hong Kong Monetary Authority (HKMA), the Securities and Futures Commission (SFC), and the Insurance Authority. In addition to being regulated and supervised by the HKMA, banks are required to become members of and adhere to the rules of the Hong Kong Association of Banks (HKAB).

The Banking Ordinance is the basis of the legal framework governing the banking sector. The Bank Advisory Committee, which is composed of members of public-sector and private financial institutions, advises government authorities on issues concerning the Banking Ordinance.

The Banking Ordinance was amended in 1986 to authorize the Commissioner of Banking to regulate the banking sector, set minimum capital standards, and limit loans to customers and bank employees. Amendments to the Ordinance in 1995 gave the HKMA broader powers, including responsibility for all matters pertaining to the authorization of banks. The HKMA can suspend or revoke the license of a bank found to be in violation of regulations designed to protect the safety and soundness of the financial system. It is also authorized, after consultation with the Financial Secretary of Hong Kong, to take over a financial institution that is unable to make payments or if it is deemed in the public interest to take control of the firm.

There is a three-tier banking system of "authorized institutions" in Hong Kong: licensed banks, restricted-license banks, or deposit-taking companies. Only licensed banks are permitted to accept deposits of any size and maturity and to offer checking and savings accounts. They effectively function as commercial banks. Restricted-license banks are limited to accepting deposits of more than HK$500,000 and thus offer investment banking services. Deposit-taking companies are only authorized to accept deposits over HK$100,000 that have an initial maturity of at least three months. Hong Kong adheres to the Basle principles for bank supervision.

The approach is one of ongoing supervision and includes on-site reviews of operations and financial records and off-site reviews of financial statements and reports. Banks are required to be incorporated and publish detailed audit reports as well as monthly returns showing assets and liabilities. In addition to information on their balance sheet and quality of assets, banks are required to disclose inner reserves, realized profits, and net assets. Authorities meet annually with internal and external auditors to review each institution’s audit and determine if the institution is in compliance with prudential standards and the Banking Ordinance. The Banking Ordinance, in turn, provides a legal basis for enforcing the Basle standards. Violation of the Banking Ordinance is punishable by fines, imprisonment, or both.

The Banking Ordinance restricts the use of the word "bank" to those institutions that are either licensed or restricted-license banks. In the latter case, the word "bank" must be accompanied by either "merchant" or "investment." Only a "fit and proper person" can be issued a banking license, and there exist controls regarding the ownership and management of an authorized financial institution. An authorized institution is required to inform the HKMA if it makes changes to any documents that outline the institution’s procedures. Approval is also required before there can be any changes in a bank’s ownership.

The Banking Ordinance also sets forth minimum capital requirements for authorized institutions. Locally incorporated banks must have paid-in capital equal to US$388 million and net assets of US$518 million dollars for authorization to operate a licensed bank. Applicants for a restricted-license bank must have paid-in capital equal to US$12.8 million.

Authorized institutions are not permitted to lend more than 25 percent of their capital base to a single customer or group of related customers, nor are they allowed to hold more than 25 percent of shares in other companies. No more than 10 percent of an authorized institution’s capital base may be used for unsecured loans.

The HKMA adopted BIS capital-adequacy guidelines in 1989. The minimum standard according to BIS recommendations is a capital-adequacy ratio of 8 percent. The national requirement in Hong Kong is also 8 percent, although some banks are required to maintain 12 percent and some nonbanks at least 16 percent. The actual risk-based capital-adequacy ratio at the end of 1995 was 17.5 percent. In December 1996, the HKMA implemented reporting requirements that direct banks to address market risk in calculating their capital-adequacy ratio.

Foreign-owned commercial banks can enter the Hong Kong banking industry by establishing a branch or by acquiring ownership of a local bank. Foreign-owned firms must apply for a license to enter the financial services market. License approval is subject to four criteria: foreign-owned firms must (1) have net assets of US$16 billion, (2) be incorporated in a country that applies the Basle principles for bank supervision, (3) have approval from their home country to operate a branch in Hong Kong, and (4) come from a country that offers reciprocal access to Hong Kong banks. Of the 366 banks in Hong Kong in February 1997, 333 were owned by foreign interests. Overseas incorporated banks hold 78 percent of the country’s banking assets, and bank deposits denominated in foreign currency represent 56 percent of total bank deposits.

Hong Kong does maintain restrictions on the number of branches that foreign banks are permitted to operate. In 1994, authorities relaxed the one-branch limit for foreign banks, allowing them to open one additional office in a separate building from the location of their main branch; however, the additional office is to be used only for "back office" functions such as processing and settling transactions conducted in the main branch office. 

Fully licensed banks (commercial banks) are allowed to establish operations in Hong Kong only as a bank branch. Restricted-license banks (investment banks) are permitted to open branches or subsidiaries. Licenses for deposit-taking companies are extended only to locally incorporated subsidiaries.
In the light of China's accession to the WTO, in December 2001 the Hong Kong Monetary Authority announced that it intended to scrap the US$16 billion minimum asset requirement for foreign banks, bringing the amount needed down to HK$5 billion, in line with the requirements for local institutions. As well as encouraging foreign financial institutions to put down roots in the SAR, the authorities hope that this move will encourage the mainland to reduce its minimum asset requirements - currently set at US$16 billion - which would make it easier for Hong Kong banks to establish there.

The Intermediaries and Investment Products Division of the Securities and Futures Commission is responsible for regulating the marketing to the public of unit trusts, mutual funds and other collective investment schemes.

The Investment Products Department has regulatory responsibility for unit trusts, mutual funds, investment-linked assurance schemes, pooled retirement funds and immigration-linked investment schemes as well as other forms of investment arrangements. These products require authorisation by the SFC before they can be marketed to the public in Hong Kong.